Treasury Market Liquidity Is Eroding With Fed’s Course a Gamble
- Gauge of dislocations is approaching last year’s high
- Market depth is worse in short-dated than intermediate tenors
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Liquidity is eroding in the U.S. Treasury market again, as the past week’s controversy about how much and how quickly the Federal Reserve will raise interest rates this year unleashed a bout of extreme volatility in yields.
The Bloomberg U.S. Government Securities Liquidity Index -- a gauge of deviations in yields from a fair-value model -- is approaching last year’s highs, reached in early November. At that time, expectations for Fed hikes had begun to mount in October, causing historically large daily swings in short-dated Treasury yields in particular.